BANGKOK: Efforts by major central banks to stimulate their economies by buying government debt could see their independence at risk once the time comes to unwind those policies, a top Australian central banker said on Wednesday.
Reserve Bank of Australia (RBA) Governor Glenn Stevens said massive purchases of assets by some central banks, known as quantitative easing, was blurring the distinction between monetary and fiscal policy.
"The problem will be the exit from these policies... ending a lengthy period of guaranteed cheap funding for governments may prove politically difficult," said Stevens in a speech on the challenges to central banking.
"There is history to suggest so," he added. "It is no surprise that some worry that we are heading some way back towards the world of the 1920s to 1960s where central banks were 'captured' by the Government of the day."
The warning comes just hours before the US Federal Reserve is widely expected to announce a fresh expansion in its purchases of Treasuries. The Bank of Japan (BOJ) is also under intense pressure to increase its asset-buying programme at its policy meeting next week.
Stevens emphasised there was nothing wrong with central banks buying assets when economies were weak and inflation was low. Indeed, he said there could be a case for central banks to directly fuel government spending, say on infrastructure which has long-lasting social benefit.
But he warned that such policies could really only buy time for governments to put their own fiscal houses in order.
Central banks, Stevens said, could not put government finances on a sustainable course, find the money to strengthen bank capital, combat the effects of population aging or drive the innovation that raises productivity.
He also noted that the aggressive easing pursued by countries such as the United States and Japan was having spillover effects by pushing capital toward higher yielding assets in other nations.
Such flows have put upward pressure on a range of currencies, from the Australian and New Zealand dollars to the Korean won and Brazilian real.
Stevens said these spillover effects had been tolerated when the expansionary policies that caused them were clearly working to stimulate demand in the major economies.
"But the slowness of the recovery in the US, Europe and Japan, I suspect, leaves others wondering whether major countries are relying more on exporting their weaknesses than has been the case in most previous recoveries," he said.
At the same time, Asia could no longer rely on a traditional mix of export-led growth assisted by low exchange rates, Stevens said. Asia was now just too large a part of the global economy for the rest of the world to absorb its production, and more would have to be consumed at home.
**
Comments
Comments are closed.